Student Loan Refinancing vs. Consolidation: Which is Right for You?

The chance to create a bright financial future. That was the whole point of going to college, right? But if you’re saddled with a bunch of student loans and high monthly payments, your financial life today may not be quite where you imagined it would be.

Refinancing or consolidating your student loans could help to change that. But what’s the difference between these two options? And which option will make a difference in your life?

Refinancing and consolidating: The big difference

In the world of student lending, the terms “refinancing” and “consolidating” are thrown around a lot. Though they mean different things, both options have a common purpose: to make paying your student loans easier by allowing you to combine multiple loans into one single loan with one monthly payment. The biggest difference lies in what each option can do for you. You refinance to save money by lowering the interest rate on federal and private student loans; you consolidate to gain greater control of your federal loans.

Got it? Let’s take a closer look at each option.

Student loan refinancing: It’s about saving money

To pay for college, you may have used a mix of loans from private lenders and loans from the federal government. The interest rates, balances, and terms for each of those loans may vary. Some of your loans may have variable rates while others have fixed rates. Student loan refinancing, which can only be done with a private lender, is designed to help you combine all of your student loans — federal and private — into a single, more affordable loan. That new refinanced loan will have a brand-new interest rate which, if your credit is in good shape, could be lower. Who doesn’t like the sound of that?

The benefits of refinancing include:

• Lower monthly payments: A lower rate means a lower bill each month and more cash in your pocket. Plus, you could save thousands of dollars in interest over the life of your education loan.
• Faster repayment: With a lower interest rate, you may be able to choose a shorter term, potentially allowing you to pay off your education loan sooner without increasing your monthly payments.
• Extended terms: If you really want to lower your payments, you could extend the term of your loan beyond the 10-year standard repayment period to 15 or 20 years. While this could help you lower your payments significantly, it would result in paying more interest over the life of the loan.
• Fixed, predictable monthly payments: If you have loans with variable interest rates as opposed to fixed interest rates, they're subject to rise when rates rise, thereby increasing your monthly payment. Refinancing would allow you to convert those loans to a fixed-rate loan, which offers predictable monthly payments (and a lot less worry).
• Easier paying: When you refinance all your student loans, you’ll only have to make one (lower) payment.

Sounds great, right? But there’s a little more to it. You have to have a good credit history or a cosigner with good credit to qualify for a refinancing loan and get a lower rate. Another important thing to know: When you use a private loan to refinance a federal loan, you’re converting that federal loan to a private loan. So, if you want the benefits that come with federal loans, such as income-based repayment options and loan forgiveness, you don't want to include your federal loans in your refinance. Instead, you could choose to just refinance your private loans.

Can’t fit a car payment into your budget? Refinancing could free up the necessary funds to make it happen.

Student loan consolidation: Have greater control over your federal loans

If you have federal loans and want to maintain the protection and other benefits that come with them, you have another option — consolidation. Federal loan consolidation involves combining all your existing federalstudent loans into a single loan with the federal government. Unlike refinancing into a private loan, which allows you to refinance both federal and private loans, the federal government does not allow you to consolidate private loans.

There’s another key difference with consolidation: the interest rate, which will be a fixed rate, won’t be lower. Rather, it’ll be a weighted average of all the interest rates on your current federal loans rounded up to the nearest 1/8%.

Let’s say you have six federal student loans. Three of them have a 5% interest rate; the other three have a 7% rate. Using the weighted average, your new interest rate if you consolidated would be 6%. That means three of your loans will experience a rate increase and three would have a decrease. However, consolidating would result in having a single loan at an interest rate of 6%.

Though it won’t necessarily save you money, consolidating does offer some great benefits, including:

• Easier paying: You’ll only have to manage one loan and make one payment each month for all your eligible federal loans.
• Predictable fixed monthly payments: If you currently have loans with variable rates, consolidating them will allow you to convert those loans to fixed rates, which offer fixed monthly payments — and peace of mind that your monthly payment won’t increase.
• Extended terms for lower monthly payments: While you won’t receive a lower rate, you can choose a longer term, allowing you to lower your monthly payments. Again, extending the term would result in paying more interest over the life of your loan, so think carefully before doing so.

One of the biggest benefits of consolidating is that it allows you to maintain your federal loan protection benefits, including income-based repayment terms and loan forgiveness. So if you expect your income to decrease or if you think you’ll pursue a career in a field that qualifies for loan forgiveness, consolidation may make sense for you.

Another thing to keep in mind is that you can always refinance your federal loans with a private lender at a later date when you may not need those federal protection benefits. It costs nothing and could help you lower your payments in the future.

Which is better for you?

Refinancing is your best option to save money while consolidation is your best option for maintaining federal loan benefits. But really, the option that’s right for you depends on a number of factors, including your goals, the types of loans you have, the current interest rates, whether you need federal benefits, and your creditworthiness and income.

Put your new knowledge to the test

Ready to do what’s best for you

The decision to refinance or consolidate your student loans starts with you — and your needs. To learn more about your options, visit our student loan and refinancing center. Then call 1-888-411-0266 to speak with a Student Lending Advisor. We’re ready to provide the unbiased advice and guidance you need to improve your student loan payments and your life.